Growth in China's Foreign Reserves Slowing

China's foreign reserves grew by only $7.7 billion in Q1 2009 vs. $153.9 billion in the same quarter last year. The country's reserves actually declined by $32.6 billion in Jan and $1.4 billion in Feb before rising by $41.7 billion in March. Despite the slower growth, China's foreign reserves stand at $1.95 trillion, with approximately 2/3 invested in US government and agency-banked securities.

The slowdown in China's reserves has huge implications for the US since we are so reliant on them to help finance our growing deficits. Even if the Chinese remain committed to investing in US government securities, dwindling growth in their reserves suggests they may not have the firepower to do so - certainly not enough to offset the impending supply necessitated to fund our deficits (estimated at nearly $1.8 trillion in 2009 as per the CBO). This could significantly pressure treasuries, which up until now have benefited from very low yields thanks to the recycling of foreign currency reserves back into the US (particularly China). Waning demand for treasuries translates into inflation down the road.